[WSBAPT] Personal Liability of PR and Income Taxes

Thu Mar 3 06:47:34 PST 2022

Agree with Phil that the personal tax liability cannot be shifted. Meant to say that the liability for negligence in missing the standard of fiduciary care can be shifted.

The standard of care is often difficult to ascertain.  In my own experience, I've had issues as the PR over local assets with 706 liability on foreign assets in countries with no tax treaty with the USA resulting in threats from the IRS to me personally over the value of assets over which I had no control, fights over control of a closely held business where the shares of stock were claimed by a creditor under a security agreement whereas I (and the IRS) wanted control on the basis of a federal tax lien preexisting the security agreement, another case where the IRS agreed to exempt me from personal liability conditional upon my future actions in the administration of the assets, yet another where I defended against fiduciary liability based upon whether actions were consistent with my duties as PR and any prejudice resulted to the government, and even an extreme case where the estate was operating a chain of cash businesses (to maintain the value of the businesses for suture) with very strong inferences of substantial employee skimming notwithstanding two accounting firms trying to implement safeguards.

In all of these cases, the issue arose of  what is the standard of care for the PR?  How to use that standard of care to get findings form the probate court to use in the litigation against the PR from unhappy business partners, unhappy heirs and taxing authorities.

Phil is absolutely correct that we cannot escape fiduciary liability and transferee liability for unpaid taxes prior to death.  But for taxes arising after death such as 706 and 1041, there are procedures to avoid personal liability when unable to pay.

Although these scenarios are infrequent, they do occur.

The take-away is that there is no magic check-list that applies to all estates. If any uncertainty, then best to outsource issues to other lawyers with specialty skills, to accounting firms with experience in the area, to tax lawyers, whatever seems appropriate to your particular assets and administration.

  -Bruce

From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Philip N. Jones
Sent: Wednesday, March 2, 2022 9:19 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Personal Liability of PR and Income Taxes

This is a subject that would require a lengthy law review article to adequately address.  A fiduciary who distributes assets when taxes are owing incurs a form of personal liability known as fiduciary liability.  And a beneficiary who receives such assets incurs a form of liability known as transferee liability.  Extreme care is needed in cases where the decedent might not have properly filed/paid.  Most accountants will not knowingly allow that risk to be shifted to themselves.  Why would they be willing to do that?  And the IRS will go after the fiduciary regardless.  Fiduciaries need to do lots of due diligence, as Bruce suggests.  Then ask the beneficiaries to indemnify the fiduciary, and/or hold back a sizable reserve. And ask the IRS to do a prompt assessment.
But first, find a long law review article on this subject.  A listserv cannot adequately address it.
Phil Jones
Philip N. Jones
Duffy Kekel LLP
Portland, OR
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 853-1482 cell

On Mar 1, 2022, at 5:08 PM, Bruce Moen <brm at moenlaw.com<mailto:brm at moenlaw.com>> wrote:

I have had this several times to me personally when I've been appointed as the Successor PR.

1.  I ask the IRS for the back transcripts.  How far back is ad hoc depending upon what else I know of the decedent, the estate, whether the decedent had an accountant, etc.

2.  I retain the services of an accountant to prepare the final 1040 and any 1041 Returns.

3.  I transfer the risk for liability in the engagement letter with the accounting firm. That is, I want in writing that they assess what is required to meet the filing requirements and that they will undertake on my behalf to meet all of the reporting requirements of the IRS and the Dept of Revenue.

If a large estate with a messy tax history, disputed back audits and the like, with large numbers, then I engage a large accounting firm with (hopefully) deep pockets for potential malpractice coverage. Then if I get sued for liability, then my carrier can bring in their carrier.

Summary:  spread the risk.  If you are not holding your office out as providing tax advice, then shift that risk to an accounting firm.

At least, that's what I have evolved over the years.  Alot depends upon your assessment of the level of risk.

Hope this is helpful.

  Bruce Moen

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Diane J. Kiepe
Sent: Tuesday, March 1, 2022 4:36 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] Personal Liability of PR and Income Taxes

Please share your practice in addressing income taxes of a decedent for final years and prior years.  I am reconsidering my approach.

I have been fortunate enough to have not had any PRs receive a note from the IRS for past due taxes of a decedent but I did recently order transcripts for a decedent so we (the PR and myself) could satisfy ourselves as to no returns be delinquent and it did turn out a small amount was owed.  We were able to pay it off with estate assets and then make distributions.  In another odd case, it was discovered that the decedent, who fell into a very, very narrow niche, was entitled to a refund.  We got that paid to the estate.  We knew to look into that decedent’s taxes based on some paperwork found in the home.

Diane J. Kiepe

Diane J. Kiepe
Douglas Eden
717 W. Sprague Ave.
Suite 1500
Spokane, WA  99201
djkiepe at depdslaw.com<mailto:djkiepe at depdslaw.com>
509-455-5300

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